Taxable Bond Funds' Best Inflows Since March: 5 Top Picks

Over the last few months, investors’ interest has evidently shifted from equity funds to taxable bond funds. As per the latest Lipper weekly fund flow report, equity-based funds witnessed strong outflows last week, whereas taxable bond funds caught investors’ fancy. In fact, taxable bond funds registered the best weekly inflows since March for the week ended July 19, according to the latest Lipper’s fund flow report.

Taxable bond funds are debt securities whose interest income is taxable at state or federal levels. Funds from this category have higher risks as well as better yields than government bond funds. Hence, investing in taxable bond funds might be a wise investment option for bond fund investors willing to take on relatively more risk in search of higher returns.

Taxable Bond Funds Register Record Weekly Inflows

Data from the Investment Company Institute (ICI) for the week ended July 12 showed that taxable bond funds saw inflows for the 32nd consecutive week. Lipper reported that taxable bond funds registered net inflows of $7.6 billion for the week ended July 19, preceded by an inflow of $949 million the week before. Meanwhile, domestic equity mutual funds posted weekly outflows of $2.43 billion.

Additionally, per ICI, taxable bond funds witnessed estimated inflows of $4.44 billion for the week ended July 12, out of which $2.56 billion were invested in mutual funds and the remaining $1.88 billion were held in exchange-traded funds (ETFs). Per ICI, domestic equity mutual funds registered weekly outflows of $8.97 billion.

Moreover, mixed U.S. economic data and recent political uncertainty led many to believe that the Fed might refrain from raising rates immediately. Also, dollar touched its 13-month low levels following weak economic data and a decline in treasury yields. The 10-year Treasury bond failed to offer a yield of more than 3% since January 2014. Given such dissuading events, investors interested in bond funds shifted their focus more toward taxable bond funds, which offer an appreciably higher rate of returns than the other bond fund classes.

Why Buy Taxable Bond Funds?

Taxable bonds are fixed-income securities issued by the country or state, whose income is not tax-exempt. These kinds of bonds are used to fund a particular project or facility. Taxable bond funds are likely to yield better results banking on improving manufacturing activity and continuing job creation. So, mutual funds with strong exposure to various taxable bonds are considered prudent investment options in an environment of steadily rising GDP.

According to Morningstar, all the categories of taxable bond funds have generated encouraging second-quarter, year-to-date (YTD) and three-month returns. Emerging markets local-currency bond funds have returned 2.9%, 11.3% and 3% over the second quarter, YTD and three-month time frame, respectively. Also, long-term bond funds have registered second-quarter, YTD and three-month returns of a respective 3.9%, 7.1% and 3.2%. Further, long-term government funds managed second-quarter, YTD and three-month returns of 4.2%, 6.1% and 2.4%, respectively.

Buy These 5 Taxable Bond Mutual Funds

This encouraging domestic backdrop calls for focus on five taxable bond mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy) and have encouraging yields. Moreover, these funds have impressive YTD returns, minimum initial investment within $5000 and low expense ratios.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

Fidelity Advisor Emerging Markets Income AFMKAX invests a major portion of its assets in debt securities of companies based in emerging markets and other investments that are linked economically to these markets. This non-diversified fund seeks appreciation of income and capital.

FMKAX has an annual expense ratio of 1.13%, lower than the category average of 1.15%. The fund has YTD returns of 7.5%. Annual dividend yield of the fund is 4.8%.The fund has a Zacks Mutual Fund Rank #2.

GMO Emerging Country Debt III GMCDX invests directly and indirectly a large portion of its assets in debt instruments of emerging market quasi-sovereign or sovereign issuers, which is denominated in U.S. dollars, Swiss francs, Japanese yen, British pounds sterling and Euros.

GMCDX has an annual expense ratio of 0.54%, lower than the category average of 1.15%. The fund has YTD returns of 9.6%. Annual dividend yield of the fund is 6.2%.The fund has a Zacks Mutual Fund Rank #1.

USAA High Income USHYX aims to provide total return through current income and capital growth. It focuses on investing in dollar denominated non-investment-grade debt securities. Along with domestic securities, USHYX may also invest without limit in dollar-denominated foreign securities.

USHYX has an annual expense ratio of 0.82%, lower than the category average of 1.01%. The fund has YTD returns of 5.3%. Annual dividend yield of the fund is 5.5%.The fund has a Zacks Mutual Fund Rank #2.

BlackRock High Yield Bond Portfolio Investor A Shares BHYAX seeks maximization of returns, consistent with a high level of income. BHYAX invests a bulk of its assets in high yield bonds. The fund may invest a maximum of 30% of its assets in bonds of foreign issuers.

BHYAX has an annual expense ratio of 0.92%, lower than the category average of 1.01%. The fund has YTD returns of 5.8%. Annual dividend yield of the fund is 4.7%.The fund has a Zacks Mutual Fund Rank #1.

Loomis Sayles Securitized Asset LSSAX seeks high current income through capital preservation. LSSAX maintains a diversified portfolio by investing largely in securitized assets including mortgage-backed and other asset-backed securities. It invests in a wide range of asset-backed securities such as residential and commercial asset-backed securities.

LSSAX has an annual expense ratio of 0.00%, lower than the category average of 0.75%. The fund has YTD returns of 2.7%. Annual dividend yield of the fund is 5.1%. The fund has a Zacks Mutual Fund Rank #1.

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